Francis Chou Makes Largest Overstock.com Paring Yet

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Jan 30, 2013
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Francis Chou, fund manager of Chou America Mutual Funds, has for the fourth time since October reduced his stake in Overstock.com (OSTK, Financial). This time, he shed 3.58% of his holding, shrinking his shares owned to 2,155,611 as of Jan. 25, according to GuruFocus Real Time Picks.


This is the most drastic cut Chou has made to the holding of his four recent parings. The company’s stock spiked 70% in the past six months, though it has declined 5% since the year began.


Shares gained momentum in October when Overstock reported its third quarter results, featuring a 7% year over year increase in revenue to $255.4 million, and a 21% gross profit increase to $46.5 million. Net income also reached $2.7 million, compared to a $7.8 million loss the same quarter the previous year.


Overstock’s revenue boost resulted from an increase in unique visitors and average order size, though it faced challenges in the form of fewer customer orders due to lower conversation rates than the previous year. Revenues typically increase in the company’s fourth quarter due to holiday shopping.


Gross profit increased due to the higher revenue and an expansion in gross margin of 220 basis points.


Overstock changed its business model in 2012 primarily in clothing and shoes, from a direct inventory-based model to a fulfillment partner-based model with the aim of reducing exposure to discounts and seasonal inventory risks. The company makes the decision to go fulfillment partner or inventory-based model based on the economics of each product at the time.


It could face higher advertising costs in the future as Google (GOOG, Financial) discontinued its free product listing service effective in the fall of 2012, replacing it with a new fee-based listing service. The amount it will increase depends on Overstock’s level of participation, if any, in the new program.


Overstock is the online retailer that sells closeout merchandise at discounts, based in Salt Lake City Utah and founded in 1997. In addition to products, it sells cars, insurance, travel accommodations, other services and advertising.


Though the third quarter marked the third in a row in which Overstock made net earnings, it was unprofitable by $19.44 million in 2011, and aside from 2009 and 2008, has not been profitable any other year of the past decade.


It has generated free cash flow for about half of the past 10 years and struggled to raise revenue: In 2011 it fell to $1.054 billion from $1.09 billion the previous year. The company has $86.5 million in cash, zero long-term debt, and $2.77 million in long-term liabilities.


Currently, it trades for a 136.9 P/E, 15.6 P/B and 0.311 P/S, which approaches a one-year high.


In August, Chou remarked in his semi-annual letter that though Overstock was one of his top decliners in the first half of 2012, “In equities, we believe the financial and retail sectors are undervalued and have invested in them using a basket approach rather than concentrating on one or two stocks in either sector.”


Other stocks in his retail basket include The Gap (GPS, Financial), RadioShack (RSH, Financial), Office Depot (ODP, Financial) and Sears Holdings Corp. (SHLD, Financial).


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